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Sewing the way to garment success

Iberasia Company targets a different niche than most Cambodian garment factories. It uses largely automated production to make its garments, replacing a labour-intensive hand-knitting process with several US$60,000 computerised machines, said Iberasia Chairman Cesar Laborda Gallego.

“If you talk about [producing] basic items, we are not very competitive with the other [factories],” he said.

“But if you want to do different things, then this is the way. So it depends which is the target market you want to reach, then you must go one way or another.”

Cambodia’s garment sector is showing strong signs of growth this year after being hit hard by the global financial crisis, though experts say challenges remain. Key among them is attracting more value-added, less labour-intensive garment production to the Kingdom.

“This will be critical to the future of Cambodia’s garment sector since the costs in Cambodia will continue to rise, and are already much higher than other competitors such as Bangladesh,” Asian Development Bank Senior Country Economist Peter Brimble wrote in an email.

If the garment sector does not diversify into higher value-added products, where labour cost becomes less important, then “the future competitiveness of the industry in Cambodia remains in doubt.”

The garments sector comprises about 90 percent of Cambodia’s total exports by value, according to an International Labour Organisation report earlier this year.

Although increased higher value-added production in Cambodia would improve the garment sector and help it diversify, experts say it is by no means guaranteed.

“Every country wants to upgrade, but competition is intense,” said Dennis Arnold, a specialist in labour politics and economic development at the University of North Carolina Chapel Hill.

“The global garment industry is becoming more competitive, not less.”

Cambodia’s garment industry had struggled during the financial crisis, though is showing signs of recovery this year. Exports totalled US$1.86 billion between January and June, a 32-percent year-on-year increase from the same period in 2010, according to statistics from the Ministry of Commerce.

Earlier this month, Garment Manufacturers Association in Cambodia Secretary General Ken Loo said factories were in a much better position this year.

The value of garment exports has increased, driven partly by rising output volumes and growing input costs, but also through improving quality of domestic production.

“[Cambodia’s garment factories] are providing more value-added service,” said Ken Loo.

The most obvious obstacle to moving further up the value-added chain was the cost of funds, specifically relatively high interest rates on loans, according to Ken Loo.

The Iberasia factory is an example of the higher value-added production Cambodia seeks to attract. The firm prides itself on its flexibility of production it offers its Spanish buyers such as the popular Mango clothing chain.

Many of Cambodia’s garment factories specialise in producing large quantities of garments over periods of weeks or months, but Iberasia targets smaller batches of higher-quality products.

The firm chose to set up in the Kingdom for a number of reasons, according to Cesar Gallego.

“One of them is you don’t need to have a partner here. ... in other countries if you want to invest, you need to have a partner that has to own 51 percent,” he said, adding tax and quota-free access to Europe, lower labour costs and support from the Council for the Development of Cambodia were also important draws.

Although he said the firm made the right choice with locating in Cambodia, some barriers do remain.

Gallego said electricity prices, transport distances and the cost of customs procedures were among the obstacles for Iberasia.

Because the factory tends to produce smaller batches of garments than the typical Cambodian factory, it must import inputs more frequently – almost every week.

“Our freight costs are almost the same as our labour costs,” he said.

But overall, Gallego said locating in Cambodia was the right move. Indeed, his main concern for the industry is that it could attract too many garment factories, making competition fierce for workers.

“...the main concern now is let’s see how many companies come, if there’s a big problem of shortage of workers or not,” he claimed.

Cesar Gallego reckons future increases in wages brought by the growing number of factories could drive mechanisation of the Kingdom’s factories.

Mona Tep, Director of the Society of Human Resources Management and Productivity (Cambodia), said that in the past, Cambodia’s factories generally worked on big orders of one or two styles of garments at a time.

However, improved skill sets for Cambodian workers would allow more flexibility for complicated, higher-end production, she said.

“In terms of training, it’s not there yet, but it’s getting there,” she said previously.

But some experts expressed skepticism about how diversified the sector really was likely to become.

“Cambodia’s advantage is labour ... but it’s important to factor in other costs. When you factor in the other costs, Cambodia is not too competitive,” said Dennis Arnold.

While issues like infrastructure were being addressed, Cambodia has several unresolved disadvantages. The unpredictability that corruption produces was one area that could be improved.
“Cambodia’s not unique with corruption, but there’s a lack of predictability,” he said.

Still, he said it was important for Cambodia to look ahead at higher value-added garment manufacturing.

“I think the Cambodian garment industry has been a lot more resilient than people thought,” he said. “It’s good to hear people talking about upgrading.”

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